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Starbucks’ New Store Portends Much for The Future of Foodservice

Delivery-only stores are nothing new. In retail, that’s been the entire concept behind drop shipping and it’s only grown in market share since the inception of eBay and Amazon.

Even in foodservice, many in Silicon Valley have raised money against the idea of such lightweight operations: Sprig clawed together $60MM, Munchery $125MM, and SpoonRocket $13.5MM (before shutting down). Higher end concepts like Ando and Maple from very reputable industry stalwarts are likewise seriously considering delivery-only.

The biggest problem today is the cost of transportation. Deliveries aren’t cheap. There’s the wear and tear of a vehicle, and a courier’s time. Many companies are working on eliminating the latter, since that seems to be the predominant expense in most cost models. To put tangible numbers to this, the cost-per-mile for a taxi with a human driver is $2.86 per mile; with automation, that price falls to $0.35 per mile. That’s nearly a logarithmic decline.

Cost concerns will eventually be assuaged. Companies like Starship Technologies already boast deliveries for $1 in major metro areas via rolling robots. And once automated vehicles arrive in the next 5-10 years, the range (and lower cost) of deliveries will extend beyond the major metro areas.

But first, we must address the elephant in the room. In weeks past, Starbucks seemed to “suffer from its online ordering success” because queues for online ordering pickup were out the door.

Don’t buy it.

The reason for these lines is because Starbucks is not very sophisticated. Their outcomes tell me they didn’t bother to use data science to model out demand patterns, and likely didn’t share that feedback loop with operations to plan labor allocation. It’s the same reason you can online-order a bag of coffee from Starbucks only to visit the store and discover they haven’t had that item in stock for a week: bad systems implementation and little adherence to data.

All that aside, Starbucks’ ideation for mobile-only stores might well follow the natural, economic trend of a bifurcation happening in foodservice, even if Starbucks is clueless. To better understand how the future of foodservice might play out, we’ve tapped Jason Strashek founder of Avanti Commerce.

For those unaware, Jason was one of the earliest creators of online ordering. He’s responsible for building Subway’s online ordering platform, and planted the idea in Howard Schultz’s mind in the early 2000’s. Starbucks, naturally, carelessly decided to make their online ordering solution a political project and built in-house at the expense of shareholders. Classic retail!

Starbucks’ first mobile-only store is reserved for its corporate employees. Orders will be placed outside the store via mobile interfaces, and patrons will pick up their product at a selected time. There won’t be delivery services… but it’s not a quantum leap to see how they get there.

This concept is wisely iterative: it not only skirts today’s economic headaches of delivery, but it allows Starbucks to focus on its footprint optimization. Once it gets the hang of running operations from orders that are placed 100% off-site, then it can feather in delivery to serve those off-site patrons as delivery becomes economic.

For example, if Starbucks doesn’t need to run multiple registers for ordering queues, it could dedicate that labor pool to production. If consumers are taking their product off-premise – which is the most common use case for mobile ordering – the overall size of the store could shrink. During this phase Starbucks should learn about modeling demand from its mobile-only store experience. If it does, it will be able to determine how to schedule deliveries that are not only good for its bottom line, but also meet customer product expectations.

The trends for deliveries and online ordering leave Jason expecting a bifurcation within a bifurcation. He explains it like so:

“You will doubtlessly see a bifurcation in foodservice overall: fine/casual dining-type establishments that are selling a certain experience, and everyone else. People want to go out and be entertained, so it’s not as if the idea of dining out (staying on premise) is going to go away: it just becomes a smaller part of the market, and likely with better service.”

As that market breaks apart, Jason believes fast casual will become unique and the segment will further split within itself.

“If you think about what Starbucks and Panera are doing today, they’re saying it’s okay to visit their location alone, grab a meal, and lounge in-store. You can’t do that at a bar or full service restaurant without looking out of place.” Footprint shrinkage would thus be a mixed bag for a concept like Starbucks, which sells itself as a quiet ambience with free wifi for customers to hold meetings.

“Consumer acceptance might change,” he adds, “but I still see the fast casual segment as providing the type of conditions where solo-dining isn’t taboo.”

This is an interesting observation to consider when the economics for deliveries and online ordering would seem to make the smaller footprint the way to go. NPD says that 30% of restaurant volume is currently take out, so does that mean the average restaurant will be 30% smaller at a minimum? Will 30% of restaurants go out of business?

“It is actually very concept-dependent,” Jason explains. “Some concepts will surely tradeoff square footage for leaner operations, but there’s some risk in commoditization. If you’re opening a new restaurant how will you show you’re unique if you can’t provide an experience that’s not commoditized? Maybe your pitch IS that you’re fast, cheap and convenient, but I doubt very many chefs see themselves in that role.”

Instead, a restaurant’s flexibility in positioning might be limited by the the concept they choose. “There’s nothing keeping a fast casual hamburger restaurant from attempting to replicate what Panera and Starbucks offer by way of a lounge experience, in theory. But how many would-be loungers want to leave smelling like fried food? How many want to hear the hissing of hot oil? Thus the value of a larger footprint might be intrinsically constrained by other choices,” Jason says.

If Starbucks can become more sophisticated and figure out the nuances with its online ordering-only store it will surely set an industry precedent. But what they come up with might not be applicable for every operator.

“Quick Serve and Fast Casual restaurants will need to reinvent themselves as the market goes through the changes of online ordering and delivery. Unfortunately, it’s not so black and white. The right answer might be to shrink footprint for some, but that might be horrible advice for another.”

With the consumer’s choice to order, pay and enjoy food/beverage outside the restaurant, restaurant brands will be forced to pick a direction: embrace consumer’s mobility and convenience (leveraging media and social channels to promote the offering) or invest further with an up-market offering that encourages the customer to enjoy the restaurant environment. Those brands that don’t focus on a great dine-in experience should focus on streamlined order, payment and fulfillment.

But for a market that’s not even keeping pace with inflation, there will be a non-trivial percentage of restaurants that close their doors. Just like Amazon revealed retailers’ inefficiencies in brick and mortar, the increase in online orders and delivery will require better (and smarter) implementation of technology and supply chain analytics methodologies. The preponderance of restaurants cannot implement basic tools today, and that’s going to be a real problem when they’re competing against grocers and Silicon Valley startups leveraging data to optimize everything.

Starbucks is on the forefront not because they’re a sophisticated company, but because their competition is unfathomably unsophisticated. Unsurprisingly, Starbucks has again the opportunity to demonstrate how foodservice operators will need to adapt to compete, but when I’m betting on the sophistication of a merchant to prevail, I never hold my breath. Jason, however, remains a little more optimistic.